Finance ministry and RBI split now out in the open

The cold war between the finance ministry and the Reserve Bank of India (RBI) on the latter’s decision to not cut interest rates came out in the open on Wednesday after RBI Governor Urjit Patel said that members of the Monetary Policy Committee (MPC) had refused to meet finance ministry officials for a pre-policy meeting.

"The meeting did not take place. All the MPC members declined the request of the finance ministry for that meeting," Patel said, when asked at a post-monetary policy press conference whether such meetings compromised the autonomy of the RBI.

Ahead of the second bi-monthly policy review of 2017-18, unveiled on Wednesday, the finance ministry had scheduled a meeting with the interest rate setting panel.

The finance ministry reacted sharply to the RBI’s decision not to cut rates, with Chief Economic Advisor Arvind Subramanian telling reporters that “in recent times, seldom have economic conditions and the outlook warranted substantial monetary policy easing.”

Subramanian said that non just headline prices, core inflation had declined as well and indicated that the RBI’s “inflation forecast errors have been large and systematically one-sided in overstating inflation.”

The CEA also said that real economic growth had seriously decelerated as suggested by indicators such as gross value added, index of industrial production, capital formation and capacity utilisation. Even consumption had been coming down as shown by personal loan growth data, the CEA said.

Subramanian’s statements, and the views of other senior policymakers in North Block, who spoke to Business Standard after the MPC’s decision on Wednesday, clearly show that all is not well between the ministry and the RBI.

“There is absolutely no economic basis for the MPC’s decision to hold rates today. It is more an issue of the governor’s ego,” said an official. “There will be no better time to cut interest rates,” the person said. Patel’s public comments on the supposed meeting between MPC members and finance ministry representatives was dubbed “uncalled for” by another official.

Traditionally, the RBI Governor visits the Finance Minister ahead of each monetary policy meeting. He also meets the finance secretary, economic affairs secretary and the chief economic advisor. It is at such meetings that the government presents its views to the RBI.

However, since the formation of MPC last September, the view in the ministry has been that there needs to be a forum for the government to express its views to all the MPC members. An informal three-member group was formed consisting of the then Economic Affairs Secretary Shaktikanta Das, Principal Economic Advisor Sanjeev Sanyal and the CEA. This group was scheduled to meet the three independent members of MPC – Pami Dua, Chetan Ghate, and Ravindra Dholakia, on June 1 in New Delhi, and Governor Patel, RBI Deputy Governor Viral Acharya, and executive director Michael Patra in Mumbai on June 2. These were to be the first set of meetings under this new mechanism.

In an interview with Business Standard last month, Subramanian justified the need for the three-member finance ministry panel. “The act (Finance Act 2016) very clearly says that the government should be allowed to provide inputs to the monetary policy committee. This group is just consistent with that… Remember, these are inputs, we don’t pressurise them. They are free to take our views into consideration or not. We will meet them before monetary policy meetings to present our opinions,” he had said.

Das retired on May 31, and Sanyal was out of the country on official work. It is understood that Das’ replacement, Corporate Affairs Secretary Tapan Ray, who has additional charge of the department of economic affairs, was still new to the job. Hence it fell upon Subramanian to hold these meetings.

However, Business Standard learnt that Das was informed by the RBI on June 1 itself that no such meetings would take place and the government’s views should be given to the MPC in writing. All the material prepared for the meetings, including a presentation, were then mailed to the central bank.

Patel later had a meeting with Finance Minister Arun Jaitley.

There is no clarity among officials on what will happen to the three-member ministry panel as it is clear that Patel has rejected the mechanism and instead prefers to stick to existing convention. Ministry officials say on how best to communicate with the RBI would be taken by Jaitley after he comes back from his foreign trip.